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Noting GATA, Forbes asks: Is your gold safe in an ETF?

Section: Daily Dispatches

Is Your Gold Bullion Safe In An ETF?

By William Baldwin
Thursday, September 30, 2010

What's hotter than the price of gold? Gold conspiracy theories. Conspiracy theorists say that the price is being manipulated, by central banks and big dealers, and that when the truth comes out the price of an ounce could go haywire -- say, to $3,000 or $5,000.

The purported plots against gold loving investors are pretty convoluted. Among the possibilities:

-- Many of the gold bars in vaults are fake, having been replaced with tungsten, a metal with a nearly identical density.

-- Some of Uncle Sam's giant gold hoard may have gone missing. The bars have been either whisked out of Fort Knox by government agents or, more likely, pledged or traded away in derivative transactions involving other central banks.

-- The banks that act as custodians for gold bullion funds are not to be trusted, because they have secret short positions in gold futures.

... Dispatch continues below ...


Sona Resources Expects Positive Cash Flow from Blackdome,
Plans Aggressive Exploration of Elizabeth Gold Property

On May 18, 2010, Sona Resources Corp. (TSXV: SYS, Frankfurt: QS7) announced the release of a preliminary economic assessment for gold production at its flagship Blackdome and Elizabeth properties in British Columbia.

Sona Executive Chairman Nick Ferris says: "We view this as a baseline scenario for gold production. The project is highly sensitive to the price of gold. A conservative valuation of gold at $1,093 per ounce would result in a pre-tax cash flow of $54 million. The assessment indicates that underground mining at the two sites would recover 183,600 ounces of gold and 62,500 ounces of silver. Permitting and infrastructure are already in place for processing ore at the Blackdome mill, with a 200-tonne per day throughput over an eight-year mine life. Our near-term goal is to continue aggressive exploration at Elizabeth and develop a million-plus-ounce gold resource, commencing production in 2013."

For complete information on Sona Resources Corp. please visit:

A Canadian gold opportunity ready for growth

Some of this is borderline kooky. Some is almost plausible. Just what are the U.S. Treasury and the Federal Reserve up to with their gold reserves? No less a personage than U.S. Rep. Ron Paul, R-Texas, is demanding an outside audit of the Fed, in part to get an answer to this question.

If you believe the official numbers, published by the World Gold Council, the U.S. government holds 8,133 metric tons worth $343 billion. The stash is divided among a number of sites: Fort Knox in Kentucky, an underground vault at the New York Federal Reserve Bank, a vault in West Point, N.Y., and storage bins at some federal mints.

But that New York Fed vault also contains metal belonging to other nations. How do we know that the Fed hasn't traded away its gold reserves?

That's the question being pointedly asked by something called the Gold Anti-Trust Action Committee (aka GATA). This little nonprofit (budget so far this year: $50,000 or so) is trying to fling open the doors of the secretive Federal Reserve with a Freedom of Information Act lawsuit seeking documents on gold swaps. So far, no dice. The Fed has asked the U.S. District Court for the District of Columbia to throw the suit out.

GATA is the creature of long-time gold bugs William J. Murphy, 64, and Chris Powell, 60. Murphy, who was briefly a pro football player, runs a gold-watching site out of a Texas office. He estimates that he has 2,500 subscribers (at $299 a year) to Powell has a day job as managing editor of the Manchester (Conn.) Journal Inquirer.

The pair pay GATA's bills with contributions from individuals and smaller gold mining companies. Powell says that the big miners shy away from chipping in lest they offend the governments that control their mining permits.

Powell's analysis of the gold market: The Fed is in cahoots with other central banks, such as the Bank of England, to "surreptitiously" depress the price of gold by selling from their stockpiles. Surely the motivation is there. If gold went to $5,000 an ounce, pounds and dollars would suddenly look rather worthless and the next thing might be a bout of hyperinflation.

There's also no denying that the U.S. government's holdings are shrinking. The tonnage was three times as high at its peak in the mid-20th century. Even if this country still owns 8,133 tons unencumbered by any swap or other obligations, it could someday run out of ammunition with which to keep the value of a dollar propped up.

All this talk of dark plots and secretive central banks plays into the hands of gold bullion vendors. These dealers in coins and bars compete with the exchange-traded gold funds like SPDR Gold Shares (GLD), which sell paper claims on trusts that hold gold in bank vaults.

Of course, if you trust no one's paper, you take possession of the metal and put it under your bed, next to a shotgun. The problem with this approach lies in the transaction costs.

Banks can trade gold bars back and forth with some efficiency because they have not just assaying equipment but paper trails detailing ownership of a bar from the moment it was cast by a member of the London Bullion Market Association. You don't have that when you waltz into a dealer looking to sell a 400-ounce brick. Coins can't be trusted either; fake gold of various sorts can be found on Ebay.

Buy gold coins from a dealer and you'll pay a premium of 5% or more over the metal value, says William Rhind, who runs the U.S. marketing arm for ETF Securities, which offers a SPDR Gold competitor called ETFS Physical Swiss Gold Shares (SGOL). You'll also suffer a discount of 5% or more when you go to sell coins, he says. And of course you have to worry about whether the dealer slipped you a gilt-edged hunk of tungsten.

Powell and Murphy don't like shares of any of the big ETFs. (The category, led in size by the SPDR product, also includes iShare's gold fund, ticker IAU.) What's not to like? Two things. One is that shares in these entities, which are organized as business trusts, entail only an indirect claim on a pile of gold. Unless you are a big brokerage firm, you don't have the right to take your shares to a teller window and get the metal in exchange.

The other thing about the ETFs is that they use custodians like HSBC and JP Morgan Chase that are players in the wholesale gold market. Therein lies a potential conflict of interest with duty, says GATA. The Gatans prefer services like Bullionvault, an online venture that assigns you your own chunk of gold, stored in New York, Toronto, or Zurich.

Rhind, for his part, pooh-poohs most of the GATA theory about collusive pricing in the gold market. He is selling into a different set of fears. You'll love his firm's product if you are uneasy about some of the newer and smaller players in the gold hoarding business.

ETF Securities, founded in 2003 by investment banker Graham Tuckwell, is one of the largest operators of commodity ETFs, with $21 billion of assets. Its gold is in the custody of UBS and under the watchful eye of auditors who occasionally drill into the bars to prevent any funny business. The metal is in Zurich, far from the reach of any future U.S. decision to outlaw the private ownership of gold. Banks in London and Toronto are less safe, Rhind says, because their host governments can't be trusted not to go along with a confiscation order like the one that came upon U.S. savers in 1933.

Yikes -- a conspiracy between the U.S., Canada, and England? It could happen. Anything could happen.

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Join GATA here:

The Silver Summit
Thursday-Friday, October 21-22, 2010
Davenport Hotel, Spokane, Washington

New Orleans Investment Conference
Wednesday-Saturday, October 27-30, 2010
Hilton New Orleans Riverside Hotel

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Prophecy to Become Coal Producer This Year
with 1.5 Billion Tonnes of Resource

Prophecy Resource Corp. (TSX.V: PCY) announced on May 11 that it has entered into a mine services agreement with Leighton Asia Ltd. to begin coal production this year. Production will begin with a 250,000-tonne starter pit as planned in August, with production advancing to 2 million tonnes per year in 2011. Prophecy is fully funded to production and its management team includes John Morganti, Arnold Armstrong, and Rob McEwen.

For Prophecy's complete press release about its production plans, please visit: